Economics at your fingertips  

Quantity of finance and financial crisis: A non-monotonic investigation☆

Xun Zhang (), Zongyue He, Jiali Zhu and Jing Li

The North American Journal of Economics and Finance, 2018, vol. 44, issue C, 129-139

Abstract: Whether finance is beneficial to economic development remains ambiguous. There are studies arguing that finance can facilitate growth and increase stability. However, the recent global financial crisis has led some to argue that finance can decrease stability and lead to more crises. This paper constructs a non-monotonic framework of quantity of finance (measured by leverage) and financial crisis and decomposes leverage into fundamental and excess components. Using cross-country level data, the empirical results confirms that it is excess leverage, rather than fundamental leverage, that results in the increase of probability of financial crisis. Further empirical results show that excess leverage leads to a higher probability of currency crisis, asset price collapse, and banking crisis, while fundamental leverage helps alleviates the crises. This paper reconciles the two contrasting views of the relationship between finance and economic development and provides strong policy implication to pay special attention to the sudden increase of leverage, which is probably excessive, rather than fundamental leverage.

Keywords: Quantity of finance; Leverage; Financial crisis; Non-monotonic (search for similar items in EconPapers)
JEL-codes: E51 E60 G01 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-03-31
Handle: RePEc:eee:ecofin:v:44:y:2018:i:c:p:129-139